Sterling hedging costs hit record highs

The cost of hedging against sharp swings in sterling over the next week rose to a record high on Friday as the contract rolled over to capture the date for Britain's vote on whether to stay in the European Union. In the spot market, sterling recovered from 10-week lows against the dollar as both sides suspended their campaigns after a pro-European Union British lawmaker was killed on Thursday.
Some analysts said the killing of Labour Party lawmaker Jo Cox might boost sentiment towards the "Remain" campaign in the June 23 vote. The implied probability of a "Remain" vote rose to 67 percent on Friday after falling as low as 60 percent early on Thursday, according to Betfair odds. The pound rose 0.7 percent to $1.4318, recovering from Thursday's low of $1.4013, its lowest since early April. It was also 0.15 percent higher against the euro at 78.92 pence per euro.
"The market's perception of Brexit probabilities may have been reduced in the last 24 hours but this is going to have a limited impact on currency markets unless it is followed through by polls released in the coming days," said Hans Redeker, Morgan Stanley's head of currency strategy. In a sign of heightened nervousness, the one-week sterling/dollar implied volatility - a gauge of how sharp swings will be over the June 23 referendum date - traded at 50 percent, its highest ever.
"Liquidity is very thin and there is not a lot going on there, but by the looks of things it means sterling/dollar will rise to around $1.5150 if there is a 'Remain' vote and drop to $1.3350 if there is a vote to leave," said one trader at a North American bank in London.
Amid expectations that thin liquidity will be an issue next week, some banks like ING and Societe Generale have written to clients to warn them of difficult trading conditions and large gaps in pricing of assets. Traders say volumes have fallen and many investors are trying to close out some of the net $6 billion in bets placed on a weaker pound, judging they cannot be exposed to the risk of an instantaneous 5-10 percent jump in after a Remain vote. Sterling has suffered since the end of last year from a steady pricing in of risks from a Brexit, seen largely as related to shocks to growth and the financing of Britain's huge current account deficit. It has fallen 6 percent against a trade-weighted basket of currencies since the start of 2016.